Nasdaq grants raise questions of conflict

Andrew CountrymanTribune Staff Writer

The Nasdaq stock market's foundation made more than $250,000 in donations last year to non-profit groups affiliated with Nasdaq directors, a practice that has come under increasing scrutiny because of conflict-of-interest concerns.

In September, federal regulators demanded information about similar donations by the New York Stock Exchange and its foundation to organizations affiliated with former exchange board members who awarded the massive pay package that led to the resignation of former Chairman Richard Grasso.

A Chicago Tribune examination of the Nasdaq Stock Market Educational Foundation's tax filings and affiliations of the stock market's directors, meanwhile, found $257,000 in similar payments last year.

And the total reached at least $457,000, or 12 percent of the foundation's giving last year, taking into account donations to groups connected with governors of the National Association of Securities Dealers, plus directors' alma maters. The NASD controls Nasdaq through its majority ownership in the exchange.

The Nasdaq donations are dwarfed by the size of the NYSE donations, where contributions to groups associated with compensation committee members alone totaled $1.3 million last year. And Nasdaq chief executives have been paid much less than what Grasso received in recent years.

Still, critics say such donations can be problematic, and some foundations prohibit them entirely.

Addressing these types of donations generally, Pablo Eisenberg, a philanthropy expert and senior fellow at Georgetown University's Public Policy Institute, said they at least raise questions.

"I think it's a serious conflict of interest," he said. "In some way, it does smack of self-dealing."

Hardwick Simmons, who was chairman of both the Nasdaq stock market and its educational foundation in 2002, said Nasdaq directors may have recommended that groups with which they're affiliated seek donations from the foundation, which finances financial-markets education initiatives.

But he said that directors' positions do not influence the awarding of grants.

"These things make no difference whatsoever," he said.

Stock market officials said foundation board members recuse themselves from grant-award decisions if any conflicts of interest are identified.

"The Nasdaq's Educational Foundation board carefully screens each grant request ... and has adopted a conflicts of interest policy to help ensure that grants are objectively considered," Nasdaq said in a written statement.

Some policies are stricter

Some foundations, however, go a step further, adopting policies to ban donations to groups affiliated with the parent companies' directors.

Indeed, last month, the NASD launched its own Investor Education Foundation with such a prohibition on donations to groups affiliated with NASD governors.

"I think the reason for that is to avoid any potential conflicts of interest or to avoid any appearances as well," said John Gannon, NASD associate vice president for investor education.

"I think as a securities regulator, we have a strong interest in ensuring there's no conflict of interest," he said. "That's why we felt strongly about putting in that prohibition."

Some corporate foundations have gone a similar route, including the EDS Foundation.

Enron made sizable donations to groups affiliated with directors, including a cancer research center run by an audit committee member. Critics raised concerns about these donations even before the company filed for bankruptcy in December 2001.

Simmons -- who has stepped down as head of the Nasdaq foundation, replaced by current Nasdaq CEO Robert Greifeld -- said he could understand why some groups adopt such policies. But he said he didn't feel it was necessary for the Nasdaq foundation.

"These are small amounts," he said. "It's all in the spirit of the way these things are done."

Non-profits can be hurt

Some experts in philanthropy are not troubled by such donations.

Terry Saario, former president of the Northwest Area Foundation in St. Paul, who has sat on several non-profit boards, said these donations are common among small foundations.

She said many non-profit groups have large boards with many prominent people, including business leaders. Cutting them off from their corporations' charitable efforts is counterproductive, she said.

"You are then implicitly penalizing organizations that have on their boards active members of the community," she said. "I'm not entirely certain that it's fair to the non-profit."

Among the amounts paid by the Nasdaq foundation last year was $107,000 to the National Academy Foundation, where Simmons is a director.

Nasdaq spokeswoman Bethany Sherman noted that the foundation has been making grants to the group for roughly a decade, well before Simmons became CEO of the stock market.

It also made a $100,000 donation to the University of Southern California, including the Marshall School of Business. Nasdaq director Frank Baxter sits on a Marshall advisory committee.

In addition to last year's payments, the Nasdaq foundation paid out $70,000 in awards in 2001, with $50,000 of it going to the Wharton School, the business school at the University of Pennsylvania. Wharton alumnus and university trustee David Pottruck, CEO of Charles Schwab Corp., served on the stock market's board from 2000 until earlier this year.